Now is the time to do it?
Many Americans are wondering what to do with your retirement savingsI’m not sure whether to head for exits or buy more stocks on sale. The recently passed CARES law makes it easier for you to access your 401 (k) and retirement accounts, but there could be important long-term consequences for your financial security. I have spoken with several financial experts to get answers to your most pressing concerns.
My 401 (k) dropped $ 31,000 in three weeks. Should I borrow it now to avoid bigger losses?
You are not the only one thinking about tapping into your 401 (k) right now. A survey earlier this week by Blind – an anonymous professional network of around 3.5 million verified workers, mostly in the tech and financial services industries – found that 48.5% of 3,800 respondents had made changes to their 401 (k) account since start of the coronavirus pandemic.
While 25% contributed more or increased their investment and 11% less or decreased their investment, almost 6% said they had withdrawn money from their pension plan or divested from stock options, s’ they had some. Blind conducted another survey on Friday which found that around 3% had taken out a 401 (k) loan in the past month, while nearly 8% had withdrawn money from their workplace pension plan. .
If you need emergency cash flow and your 401 (k) is your only source of funds at this unprecedented time, then taking a short term loan from your retirement account as a ‘last resort’ may be a viable option. , some financial advisers say. You will reimburse yourself instead of paying 11% interest on average on a personal loan. However, keep in mind that you are borrowing from your financial future and may be putting your financial security at risk in retirement.
The recently adopted CARES law now allows you to borrow up to $ 100,000 (the previous loan limit was $ 50,000) of your 401 (k) and delay repayment for up to a year. After you borrow, you will typically need to repay the loan within five years, under the terms of your 401 (k) plan. Under the CARES law, loan repayments due in 2020 can be delayed for up to one year from the time you take out the loan. However, if you cannot repay the loan within the time frame allotted by your plan, your outstanding balance will be taxed as a withdrawal, and you will also have to pay a 10% early withdrawal penalty.
It is also important to note that if you are leaving your job – whether by choice or not – there is a good chance that your plan will require you to pay back the money fast enough; otherwise, your account balance will be reduced by the amount due and considered a distribution. And unless you are able to find that amount and put it into a qualifying retirement account, that distribution is taxable. ·
According to a certified financial planner Carolyn McClanahan from Life Planning Partners in Jacksonville, Fla., “Borrowing against a 401 (k) to avoid losses is not a good idea.” Withdrawing money from your retirement savings account when the market has fallen means you’re locking in your investment losses, she says. Now is the time to review and reassess your asset allocation.
“The best course of action is to create an investment policy to determine how much they should have allocated to risky assets and safe assets,” said McClanahan, who is also a member of the CNBC Financial Advisors Council. “The level of risk to take depends on your time horizon, your ability to save and your psychological ability to take risks. Once an investment policy is created, assets need to be rebalanced to fit the situation. investment policy. “
If you need to withdraw money from your 401 (k) due to financial hardship caused by the coronavirus pandemic, the recently passed CARES law now allows you to borrow up to $ 100,000 (the previous loan limit was $ 50,000) of your 401 (k) and delay repayment for up to a year. You can also take a penalty-free distribution from your IRA or 401 (k) up to 100% of your balance or $ 100,000, whichever is less. You won’t have to pay the 10% early withdrawal penalty if you’re under 59 and a half – and you can pay taxes on the money you withdraw over a three-year period or pay no tax if you pay it all back. The catch is, your employer must agree to adopt these new arrangements for your existing 401 (k) plan.
Since the new law was passed just a few weeks ago, some employers are still deciding whether or not to amend their plans to include these provisions. Yet a pension consultant Denise appleby says that “if enough employees show an interest, some employers, who were unwilling, might determine that it is worth the administrative costs for processing transactions and modifying the plan.”
We’re 62 and 67. Should we transfer our 401 (k) money to a Roth IRA because we don’t have the longevity to recoup huge losses from the coronavirus? We want to have access to money with the least amount of penalties.
Since you’re both in your sixties, if you want to transfer your 401 (k) money to a Roth IRA so that you can withdraw that money without penalty, you don’t have to make a move at all. The 10% early withdrawal penalty applies to 401 (k) account holders under the age of 59 and a half, so you will not be penalized for withdrawing money. However, you will have to pay taxes when you withdraw the 401 (k) money. With a Roth IRA, you can make tax-free withdrawals.
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One option is to withdraw your 401 (k) over time to reduce the tax impact, McClanahan said. Another option is to do a 401 (k) rollover in a traditional IRA. “A lot of times the 401 (k) workplace charges a fee to make withdrawals, and you often have to go through an administrator to get distributions. Stand-alone brokerage IRAs don’t have these kinds of issues, ”she said. The third option is to roll all the 401 (k) money into a Roth IRA. Just keep in mind that you’ll “have to pay taxes on the entire conversion in a year, which can be quite onerous,” McClanahan said.
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On the flip side, now might be a really good time to consider a conversion because the investment values are lower and you can pay less tax to convert to a Roth IRA, the chartered financial planner said. Diahann lassus de Lassus Wherley and a member of the CNBC Financial Advisors Council.
“If you are unsure whether you need this money but the tax rate is low, consider that minimum distributions are not required on Roth accounts. This means the money can grow tax free. , maybe for a longer period. And if you need to, you can only take what you need tax-free, ”she wrote in a recent newsletter to customers.
You have several options for the type of account you put your retirement savings in, but where you invest that money is also extremely important. “My biggest concern is that they’re invested too aggressively if they’ve had huge losses,” McClanahan said. “They should consider consulting a financial planner to help them determine if they need to change their investment allocation and to determine what type of account would be best for them in the future.”
In response to the coronavirus pandemic, many financial advisers across the country are offering their services at reduced rates or free to those in need. Find an advisor in your area by going to Financial Planning Association and National Association of Personal Financial Advisors‘ websites.
I would like to buy stocks during this market downturn. I know that if I make the right choice it could really make my retirement comfortable. What are the right choices?
“Choosing individual stocks is a guessing game. The best way to invest is to buy low-cost, well-diversified mutual funds or ETFs that are invested in a large basket of stocks,” McClanahan said. . You can Google mutual funds or exchange-traded funds (ETFs) that you might be interested in or visit Morningstar, an investment research firm, to learn more about a fund’s costs, its performance at over time and companies, sectors, stocks and / or bonds. make up the fund. Morningstar also provides a Star rating for the performance of each investment.
However, “the most important decision to make is your asset allocation,” said McClanahan. “How much should you have invested in risky assets such as stocks and equity funds and how much should you invest in safer assets such as bonds and bond funds? This choice depends on the time frame before you need your money, your ability to save, and your psychological ability to take risks. “
TO ASK QUESTIONS: Managing your money in the midst of a pandemic is an unprecedented dilemma. Submit your money questions; Sharon Epperson will look to experts for the answers.
Tune in: CNBC 7pm tonight for more from Carolyn McClanahan on managing your money through this crisis.
CHECK: How to use your stimulus check to invest for the future Going through Growing up with Acorns + CNBC.
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